Essays on Earnings Instability: The Impact of Search Effectiveness, Labour Market Policy Instruments, and Globalisation

Abstract

Chapter 1: We study the link between market thickness, labour market flexibility and wage dynamics. We consider an economy with two sectors; a risk-free sector that employs workers only, and a risky sector with matching frictions that employs both workers and employers. Workers are risk-averse, whereas employers are risk-neutral. In the risky sector, complete contracts are unavailable due to informational reasons; hence flexible self-enforcing contracts are the only means to share risk. We show that shifts out of stable employment into flexible employment engendered by improvements in search effectiveness increases the average real wage and wage volatility in the risky sector while raising the (expected) real wages and worker welfare in the whole economy. Furthermore, depending on parameter values, it may also increase economy-wide real wage volatility. Therefore, our model can explain the transitory variation in workers' earnings observed after the 1970s, even for job stayers. Chapter 2: We study the relationship between unemployment insurance, employment creation and protection, and wage dynamics. We consider a labour market in which risk-averse workers and risk-neutral employers must match for production to occur. Contracts are incomplete; therefore self-enforcing contracts are the only means to share risk. We jointly analyse the impact of financing and spending aspects of labour market policies on the welfare of the parties and wage volatility. On the financing side, we show that either ring tax or hiring tax strictly dominate payroll tax in terms of efficiency gains and may increase the employers' welfare. On the spending side, even though unemployment payment increases workers' welfare, it does so by increasing wage volatility and decreasing employers' welfare. On the other hand, hiring payment may increase the employers' welfare without causing any change in workers' welfare. While unemployment payment redistributes income between unemployed and employed workers, hiring payment produces inter-temporal redistribution during employment. The joint usage of hiring tax and hiring payment may function as minimum wage and increase the employers' welfare by smoothing the employees' income in the relationship. Chapter 3: We employ a stylized model to analyse the relationship between factor market integration (i.e., off-shoring and immigration), unemployment, and earnings instability due to employment variation. We show that factor market integration can indeed increase both frictional and long-term unemployment. Moreover, it will raise earnings instability by increasing unemployment within a parameter space.